Ruling: Out-of-state tax pros can be sued in Ariz.

Out-of-state professionals who give tax advice to Arizonans can end up having to defend themselves in courts here, the state Court of Appeals has ruled.

The judges said the fact that the attorneys being sued were in Connecticut and did their legal work there is legally irrelevant to the question of whether they can be sued in Arizona. Instead, the judges said, the issue is whether defendants in a case “engaged in purposeful conduct for which they reasonably could expect to be hauled into an Arizona court.”

And the appellate court concluded the facts of this case met that test.

The case involves Bill Beverage, who said he heard from his local accountant of an opportunity to invest in a tax shelter promoted by Chenery Associates, a financial services firm.

In mid-2001, according to the lawsuit, the accountant, on behalf of Beverage, phoned Robert Morris, managing partner of Connecticut law firm Pullman & Comley, to discuss whether that firm would issue an opinion letter to him supporting the tax shelter.

Eventually, a 58-page opinion letter was issued, and Beverage and his wife paid the law firm $50,000.

Saying he was relying on that letter, Beverage declared substantial losses on their federal income tax return related to the tax shelter.

After an audit, the IRS disallowed the losses, assessing deficiencies of more than $3 million, not counting the legal fees during the audit. Beverage then sued the Connecticut firm and the accountant.

Attorneys for the law firm got a Maricopa County Superior Court judge to dismiss the case against it, ruling Arizona courts had no jurisdiction.

Appellate Judge Diane Johnsen acknowledged that the Connecticut firm did not have regular and systematic contacts with Arizona to make it subject to personal jurisdiction in the state. But she said there are other tests to determine whether a case can be brought here anyway.

One, she said, is the extent of “purposeful conduct targeting Arizona.”

In this case, Johnsen said, the law firm accepted a phone call from Beverage’s agent, sent promotional materials about the firm to Arizona and then agreed to represent him, knowing he lived in Arizona. Johnsen also said the firm drafted and issued a letter to Beverage in Arizona, knowing he would rely on that letter in filing a federal tax return from Arizona.

Johnsen said this isn’t simply a question of interstate practice of law. She said not only did the law firm seek Arizona-specific information from the couple, but the firm also knew that if the legal opinion proved erroneous, “any personal injury necessarily would be felt by Beverage in Arizona.”

The appellate court also said there was the required legal connection between the Connecticut law firm and the lawsuit itself.

“Here the alleged injury in Arizona was foreseeable precisely because it arises from the allegedly false opinion letter (the law firm) created for and directed to Beverage,” Johnsen wrote.

Finally, the court rejected claims by the law firm that requiring it to defend itself in Arizona is unreasonable.

She said the firm offered no evidence of the burden that litigating the case in Arizona would have on it. Johnsen also said the fact that Connecticut may have an interest does not undermine the law firm’s contacts with Arizona.

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